Investors Continue the Sector Rotation

Large cap stock indexes turned in a good week and are near record highs, as can be witness with the surge in the S&P 500 index along with the Dow Industrials. The Dow Industrials bounced off its 50-day average on Wednesday and closing the week near a new intra-day record. The S&P 500 Large Cap Index ending the week above its 50-day line as well. Part of the reason for the stronger performance by the Dow and SPX has been money rotating into larger and more stable stocks, as investors have grown more defensive over the last couple of months.

The Dow and SPX gain 1.6% and 1% respectively since March lst when the market started to weaken. While the large cap indexes gained ground, the Nasdaq Composite Index lost -5.5% and the Russell 2000 Small Cap Index dropped -6.4%. In other words, investors have not necessarily left the market. However, they have been rotating out of riskier growth stocks into safer value stocks. Defensive stocks that pay dividends have been market leaders. That has not necessarily hurt the overall market trend, but isn’t necessarily a sign of confidence either.

Nasdaq Composite Index achieved an upside reversal day on Friday after losing ground the previous two days. More importantly, the COMPQ is still holding above its 200-day moving average and chart support along its early February lows. If the Nasdaq can stay above those two support lines it will likely prevent a more serious breakdown. To really strengthen the market’s short-term picture, however, the Nasdaq would have to clear initial resistance at its mid-April peak and its 50-day moving average. Unfortunately, the Russell 2000 Small Cap Index has declined below its 200-day line. For the current pullback to stay within the bounds of a normal correction, it’s important that the Nasdaq and Russell 2000 hold support levels.

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